Bonds are attractive
- Alan Lavine and Gail Liberman
Bonds for many are looking like an attractive investment right now.
However, experts say our mounting federal deficit could trigger inflation in a couple of years.
Inflation can prove traumatic--particularly to holders of bond mutual funds, which can fall in value as interest rates rise. You may wish to invest in individual bonds rather than bond mutual funds.
However, even individual bonds can fall in value if you need to sell them prior to maturity.
If you own a lot of bonds or bond mutual funds, start planning for the day when inflation rears its ugly head.
Examine whether you are well-diversified. If you have a little extra cash, consider socking some into precious metals or gold. These investments are risky, but they typically do well with inflation.
When interest rates do increase, it could pay to shop for higher rates on U.S. Treasury bonds, savings bonds and bank deposits.
Consider a money market mutual fund. Interest rates rise with inflation. Because money funds invest short term, you should earn higher rates with little risk. Bank savings accounts and CDs also become more attractive as rates rise.
Here are some tricks that can help you plan, measure and better understand your investments.
For a ballpark idea of how much to invest in stocks, subtract your age from 100. The result is how much you should have in stocks, with the rest in less risky investments. Say you're 40 years-old, consider keeping about 60 percent of your money in stocks or stock-related investments, like mutual funds or exchange traded funds. Are you 70 years-old? In that case, keep about 30 percent in stock-related investments.
The rule of 72 can tell how long it will take to double your money. Simply divide your investment's rate of return into 72 for your answer. Example: If your investment earns 10 percent, it will take 7.2 years to double your money.
How to tell if the stock market is performing well? Historically, the return on stocks should be 7 percentage points higher than the yield on U.S. Treasury bills.
Obviously, the stock market, at least as of this writing, hasn't been doing so hot this year.
Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.
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